Bank of England officials said they may need to buy more bonds to bolster a faltering recovery after holding off adding stimulus this month in a decision that was “finely balanced.”
Most policy makers said it was “increasingly probable that further asset purchases to loosen monetary conditions would become warranted at some point,” the minutes of the Monetary Policy Committee’s Sept. 8 decision said. “For some members, a continuation of the conditions seen over the past month would probably be sufficient to justify an expansion of the asset purchase program at a subsequent meeting.”
The nine-member MPC, led by Mervyn King, voted 8-1 to maintain the size of the bond plan at 200 billion pounds ($313 billion) and were unanimous in keeping the benchmark rate at a record low of 0.5 percent.
No-one joined Adam Posen, who kept up his vote for a 50 billion-pound increase in purchases. His solo run on expanding so-called quantitative easing comes as policy makers in the U.S. and elsewhere refocus their attention on faltering growth and threats from Europe’s debt crisis. The Federal Reserve may announce a third round of asset purchases today to stoke growth and reduce unemployment.
“There had been significant downside news on activity over the month, including in the U.S. and the core euro-area countries, which had pointed to a synchronized slowing in global growth,” the minutes said. Along with surveys in the U.K., growth in the second half of 2011 may be “materially weaker” than projected in the Inflation Report in August.
The central bank will publish new forecasts in November.
Pound Declines
The pound extended its decline against the dollar after the release of the minutes, falling to an eight-month low of $1.5614. It traded at $1.5670 as of 10:48 a.m. in London, down 0.4 percent on the day. Government bonds rose after the report before slipping back, leaving the 10-year gilt yield up 3 basis points at 2.42 percent. It fell to a record-low 2.18 percent on Sept. 12.
Officials considered ways of loosening policy at this month’s meeting, including “changing the maturity of the portfolio of assets held” and “revisiting the earlier decision” not to cut their key interest rate below 0.5 percent. They also discussed whether to provide “explicit guidance” on the future path of the benchmark.
“At the current juncture, none of these options appeared to be preferable to a policy of further asset purchases should further policy loosening be required,” the minutes said.
‘Dovish Direction’
“This is clearly a major swing in a dovish direction,” James Knightley, an economist at ING Group in London, said in an e-mailed note. “Should the Bank of England cut its growth and inflation forecasts, as pretty much everyone else has, then a November increase in asset purchases will look likely.”
The Bank of England said in its quarterly bulletin on Sept. 19 that the bond plan has so far had “economically significant” effects. The asset purchases that began in March 2009 and finished at the start of 2010 may have raised gross domestic product by 1.5 percent to 2 percent and equaled a cut in the key interest rate of 150 to 300 basis points, it said.
Chief Economist Spencer Dale said in the report there was “considerable uncertainty” around the effects of the asset purchases. He will speak at the South Tyneside Manufacturing Forum in South Shields, England at 12:35 p.m. today.
Fed’s Twist
In the U.S., the Federal Reserve policy makers will decide to replace short-term Treasuries in its $1.65 trillion portfolio with long-term bonds, according to 71 percent of 42 economists surveyed by Bloomberg News. “Operation Twist,” named for its goal to bend the yield curve, will probably fail to reduce the 9.1 percent unemployment rate, 61 percent of economists said. The Fed will issue a statement at 2:15 p.m. New York time.
In a separate report, the Bank of England said spending growth on goods and services had “weakened further,” employment intentions pointed to “only modest” job creation over the next year and manufacturing growth had slowed. Still, inflation remains “elevated” at more than twice the bank’s 2 percent goal.
“Justifying an explicit change in policy in favor of easing when inflation and expectations for it are so high is an extremely difficult communication challenge,” said Philip Rush, an economist at Nomura International Plc in London. “So the MPC has collectively started to prime the public and its policy cannons for the launch of QE2.”

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Canada’s dollar pared its drop as a government report showed the annual rate of inflation was higher in August than economists forecast.
The loonie, as the Canadian currency is known for the image of the aquatic bird on the C$1 coin, depreciated 0.1 percent to 99.40 cents per U.S. dollar at 7:02 a.m. in Toronto, from 99.27 cents yesterday. The currency earlier slid 0.3 percent.
Consumer prices advanced 3.1 percent in August from a year earlier after a 2.7 percent gain in the previous month, Statistics Canada said today in Ottawa. The median forecast of 26 economists in a Bloomberg News survey was for a 2.9 percent annual pace.
Bank of Canada Governor Mark Carney said yesterday in Saint John, New Brunswick, that borrowing costs may stay low beyond when full output is restored. He said the domestic recovery will be hobbled by a weak U.S. economy.
Speculation that the Bank of Canada will raise its benchmark overnight target rate from 1 percent this year has faded on concern the global economy may be headed for a recession, crimping Canadian exports.
The central bank on Sept. 7 kept its main interest rate unchanged for an eighth meeting and said there is a “diminished” need for an increase as Europe’s fiscal crisis and a slow U.S. rebound hobble the global recovery.
Canada’s economy, the world’s 10th largest, shrank at a 0.4 percent annualized pace in the second quarter, the national statistics agency said Aug. 31. It was the first contraction since the recession two years ago.
The International Monetary Fund cut Canada’s economic growth forecast yesterday to 2.1 percent for this year from 2.9 percent, citing weaker demand from the U.S., the nation’s biggest trade partner, and slower government spending.

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pound weakened to an eight- month low against the dollar after Bank of England officials said they may need to buy more bonds to keep borrowing costs low as the recovery falters.
Sterling fell for the first time in four days versus the euro as policy makers said in minutes of their Sept. 8 meeting that growth in the second half of 2011 may be “materially weaker” than projected in August. The pound also weakened after an industry report showed U.K. consumer confidence dropped to a four-month low in August.
“The Bank of England is making clear that further measures will be used if the situation worsens, and therefore the pound reacted negatively,” said You-Na Park, a foreign-exchange strategist at Commerzbank AG in Frankfurt. “What is quite clear is that the outlook for the U.K. and the global economy is very uncertain and there are a lot of downside risks.”
Sterling declined 0.4 percent to $1.5667 at 11:14 a.m. in London, after earlier falling to $1.5614, the weakest level since Jan. 12. The currency depreciated 0.2 percent to 87.27 pence per euro.
The minutes showed most of the nine-member Monetary Policy Committee said an expansion of the 200 billion-pound bond purchase program was “increasingly probable.” The committee voted 8-1 to maintain the current size of the plan and was unanimous in keeping the benchmark at a record low 0.5 percent.
Officials considered ways of loosening policy, including “changing the maturity of the portfolio of assets held” and “revisiting the earlier decision” not to cut the interest rate below 0.5 percent.
Sterling ‘Exposed’
“The shift in the discussion of the MPC has moved more than the market was anticipating,” said Ian Stannard, London- based head of European foreign-exchange strategy at Morgan Stanley. “Sterling is increasingly going to become exposed to the global slowdown.”
Sterling has depreciated 5.1 percent in the last 12 months, making it the second-worst performer among 10 developed-market currencies after the dollar, according to Bloomberg Correlation- Weighted Currency Indexes. Morgan Stanley predicts the pound will weaken to $1.53 by the year-end.
Short-sterling futures extended gains after the minutes were released. The implied yield on the June 2012 contract dropped three basis points to 0.86 percent, signaling traders added to bets for lower interest rates.
Investors are betting the Bank of England will refrain from raising interest rates until after July next year, data from Tullett Prebon Plc on forward contracts for the sterling overnight interbank average, or Sonia, show.
Nationwide Building Society said today its index of consumer sentiment slipped 1 point in August from the previous month to 48. A gauge of consumers’ future expectations for the economy in the next six months declined 1 point to 65.
U.K. government bonds fell, snapping a three-day gain. The 10-year yield climbed three basis points to 2.42 percent. Two- year yields were little changed at 0.53 percent.